Judgment puts Flagstar earnings in the red

Troy-based Flagstar Bancorp Inc. has revised its earnings reports for both the fourth quarter and the full year that ended Dec. 31 as the result of a judgment in a lawsuit last week — and in doing so pushed the quarterly results into the red.

U.S. District Judge Jed Rakoff of the Southern District of New York awarded New York City-based Assured Guaranty Municipal Corp. $90.1 million in damages plus an amount for interest, attorneys’ fees and other costs that have yet to be determined.

Flagstar (NYSE: FBC) plans to appeal the ruling but in the meantime has restated its earnings by increasing a reserve for pending and threatened litigation by $161 million or $2.87 a share.

That change in reserves had a dramatic effect on Flagstar’s earnings. For the most recent quarter, the bank-holding company now reports a net loss of $94.2 million or $1.75 a share instead of previously reported net income of $66.8 million or $1.12.

For the year, the company now reports net income of $62.7 million or 87 cents a share, compared with the previously reported net income of $223.7 million or $3.74.

Assured Guaranty had sued Flagstar in 2011, seeking reimbursement for losses it incurred after insuring two mortgage-backed securities totaling nearly $1 billion. Those securities were backed by home equity loans issued by Flagstar.

The loans were made in 2005 and 2006 under previous management.

Rakoff presided over a 12-day nonjury trial in October. He ruled that Flagstar violated agreements with Assured Guaranty by failing to follow its own underwriting guidelines.

Flagstar is the largest bank headquartered in Michigan, with $14.1 billion in assets as of Dec. 31.